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Europe's the Wild Card as Traders Watch the Fed

European debt crisis headlines are the wild card for markets Wednesday, but the interesting news of the day may come from the Fed.

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The minutes from the last FOMC meeting are released at 2 p.m. EST. Traders are watching to see what Fed members had to say about more quantitative easing , but Fed watchers are also looking to see what the Fed says about its members expectations for its balance sheet and how they formed their views on the target Fed funds rate.

“It is a bit rearview mirroresque. The flavor that comes through from the minutes oftentimes is something investors bite on,” said Mark Luschini, chief investment strategist at Janney Montgomery.

Some market participants are convinced the Fed will carry out more easing, which traders believe has provided a leg of support under the stock market’s current rally.

Besides the Fed, there are also several economic reports, including the Empire State survey at 8:30 a.m. EST; Treasury international capital flow data at 9 a.m.; industrial production at 9:15 a.m. and the National Association of Home Builders Survey at 10 a.m.

Fed Chairman Ben Bernanke and other Fed members have left the door open for more easing, if the economy weakens sufficiently to require it. The next program, if carried out, would further expand the Fed balance sheet with the anticipated purchase of hundreds of billions of dollars of mortgage securities.

“In the past the minutes had contained a few remarks about whether Committee participants thought further asset purchases were likely or whether the balance sheet would contract, so if tomorrow’s minutes are to expand on that we would expect to see something a little more substantive, perhaps how many favor expansion, contraction or no change of the balance sheet,” writes J.P. Morgan economist Michael Feroli.

Feroli said the Fed members will also include “key factors” that influenced Committee members views on the path of the funds rate. After the Jan. 24/25 meeting, the Fed issued a statement saying that it now expects to keep rates no hold until the end of 2014, more than a year longer than it previously had stated. The Fed also released individual members expectations for when rates would begin to rise.

“If we are right that any decision regarding further QE (quantitative easing) remains data dependent, then we would expect the majority of the Committee foreseeing no change in the size of the balance sheet for the time being,” he noted.

Besides the Fed and economic reports, there are a few earnings reports, including Comcast (the parent of CNBC), CBS, Abercrombie and Fitch, Deere, Six Flags and Nvidia.

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Treasury Secretary Tim Geithner appears before the House Ways and Means Committee at 10 a.m. and former Treasury Secretary Hank Paulsen appears on “Squawk Box” at 7 a.m.

Whither Stocks?

Stocks Tuesday were weighed down by concerns about Greece’s ability and willingness to abide by austerity measures, required by euro zone finance ministers and the IMF as a prerequisite to more bailout funds. A comment by the head of the Democracy party, possibly the next Greek prime minister, turned the U.S. stock market losses into a slight gain in the Dow late in the day. There were reports that he provided a letter to the European commission assuring compliance with bailout agreements.

A euro zone finance ministers’ meeting was cancelled for Wednesday but it was expected they would hold a conference call instead as Greek continues to work on its plan.

The Dow finished up 4 at 12,878 after moving in a 90 point range. The S&P was off 1 at the key 1,350 level, and the Nasdaq finished up less than a point at 2,931.

“The market has been remarkably resilient,” said Luschini, although he expects a short term pullback.

The positive economic surprises that pushed stocks higher are now fading and not likely to continue to give stocks a boost. “We think this market is vulnerable if only because of some of the conditions that make it ripe for a pullback,” he said.

“The market has been built here on the back of positive surprises,” he said.

Scott Redler of T3Live.com analyzes the market’s short-term technical and he notes an interesting phenomena. “We haven’t had a close below the 10-day moving average since Dec. 20,” he said. The 10-day moving average for the S&P 500 is now 1,343, and the 20-day is 1,329.

“Typically, the strongest stocks, the high beta stocks, follow an elevated 10- and 20-day moving average. Rarely does an index track it so well and since the Dec. 20 gap and go, the SPDR (Spy S&P 500 ETF) has not closed below or considerably below the 10-day moving average during this entire rally,” he said.

Redler said the S&P has been trying to break resistance at 1,354, a level it has hit several times in the past week. If it does close above that level, he expects to see the S&P try to make a run to 1,370, its closing high in 2011.

“In order to break through, we have to have more unambiguously good news, and I think that it’s got to be Europe again,” said Luschini.

Traders have been debating and waiting for a pull back for the past week or so. “The bulls are spoiled. Even if we do get a correction, then don’t get far away from the market… It does feel like we’re going to take out that 2011 high,” Redler said.

Follow Patti Domm on Twitter: @pattidomm

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